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February 09 Issue |
Maintenance Revenue Protection 2.0: The Urgent Threat and the Solution |
By Chris Dowse, Founder & Chief Executive Officer and Ben Galison, Principal, Neochange
With the software industry realizing the changing customer needs,
Chris Dowse and Ben Galison of Neochange share their insight into the steps
which software vendors can implement to shift towards the buyers’ perception of
value to prevent threats to maintenance revenue. This article explores the
magnitude of the increased threat and provides a three-step approach with
concrete actions all ISVs can take to protect critical maintenance revenue
streams and even grow services revenue.
Software vendors must act now to address the clear and present threat to
maintenance revenue. Long the software industry’s cash cow, maintenance and
support revenue delivers high margins that fund product R&D and is used as the
basis for company valuations in mergers and acquisitions and financing
arrangements. Multiple forces have converged to intensify the threat, including
market shifts towards buyer perceptions of value, tough economic conditions,
industry consolidation and unprecedented transparency into software usage.
In 2006, Neochange, a leading-edge management consulting firm, committed to
shifting industry norms towards greater value realization from investments in
software, technology and process reengineering, published an article on
maintenance revenue protection that was downloaded over 3000 times, indicating
this as a hot topic among ISVs. Large software vendors are already responding to
the threat. This new article explores the magnitude of the increased threat and
provides a three-step approach with concrete actions all ISVs can take to
protect critical maintenance revenue streams and even grow services revenue.
The threat to software maintenance revenue has become clear and present.
Long the software industry’s cash cow, maintenance and support revenue provides
high margins that are the funding engine for new product research and
development. The maintenance revenue stream is also used as a basis for company
valuations in mergers and acquisitions and financing arrangements. Protecting
maintenance revenue is a hot topic for independent software vendors (ISVs); a
2006 Neochange article on the subject had over 3000 downloads.
Multiple forces have converged to intensify the threat. The industry’s shift
towards buyer perceptions of value has brought downward pressure on both price
and sales volume, eroding the revenue basis on which the maintenance percentage
is calculated. Tough economic conditions have created more sales declines and
upgrade delays, making ISVs more dependent on maintenance as a larger share of
their total revenue. Struggling ISVs are especially vulnerable, relying on
maintenance revenue to fund operations as the recession makes venture funding
and bridge financing more challenging.
New end user monitoring technology (EUM) adds to the peril. Unprecedented
transparency into software usage exposes underused applications and enables
visibility into whether customers are getting actual ROI on their application
investments. In today’s cost-cutting environment, software with low levels of
effective usage puts maintenance contracts at risk of cancellation or discount.
The good news is that ISVs can protect their maintenance revenue stream and even
grow services revenue by becoming more customer-centric and making customers
visibly successful through effective adoption.
Companies can increase customer effective usage of software products through an
integrated, sequential program of improvement. For sustainable impact, each
company’s detailed approach should take into consideration its organizational
capabilities and areas of greatest risk, but the basic sequence can be summed up
as follows.
Step #1 – Mobilize Internally: Improve Customer Experience Throughout the
Company
On the surface, the concept of becoming a more customer-centric company is
hardly new. Yet aspects of this shift are essential to achieve and sustain the
changes that provide a foundation for maintenance revenue protection. Without a
core operation that can effectively support and service its customers,
protection efforts will be band-aids at best, doomed to fail in the long run.
Ensuring a positive customer experience builds customer loyalty is an important
part of protecting maintenance revenue. Surprisingly, it can also reduce
operating costs for the ISV.
Customer experience improvement needs to come from the support and services
functions, the primary touch-points for existing customers. By focusing on
effective internal adoption of the CRM, PSA and other delivery systems, ISVs can
streamline and improve the quality of customer interactions to deliver better
service levels.
The results can be impressive. One Fortune 500 company used its CRM adoption
initiative to identify annual benefit equivalent to nearly 3% of its annual
revenue. Over 40% of the benefit was hard cost savings achieved by reducing
support staff user errors, improving workflow navigation and simplifying
customer facing screens to simultaneously lower problem resolution times and
improve customer retention. A second Fortune 500 company was able to increase
professional services staff productivity by 11% through more effective PSA
adoption while increasing the delivery quality of services.
Another positive by-product of successful CRM/PSA adoption is the sharing of key
customer information across the organization. In many ISVs, customer knowledge
exists in fragmented form, trapped within organizational silos, disparate
systems and the minds of a few individuals. This fragmentation is a barrier to
the flow of key information necessary for effective customer support. Effective
CRM/PSA usage institutionalizes the cross-functional customer perspective
essential for a software company to deliver useful support and services and to
respond quickly to revenue risk situations that demand immediate action.
To improve the customer experience, leaders will need to facilitate a
cross-functional dialog and empower employees across support, services, account
management and sales groups with identifying top customer problems and proposing
solutions. Leaders can use the maintenance revenue threat as a burning platform
for change, communicating a company-wide vision for customer retention through
improved customer experience. Executives should drive collaborative action and
results with clear goals (e.g. targets for percent reduction in cancellations,
number of major account renewals and published customer ROI/success stories).
Incentives for executives, teams and account owners will need to be realigned to
foster cooperative efforts.
ISVs that are easy to do business with and meet or exceed customer expectations
through more effective adoption of internal customer-centric technologies will
be ready to ‘walk the talk’ and apply their newfound adoption capabilities to
their own products with existing customers.
Step #2 – Extend the Experience: Understand Customer Usage and Barriers to
Success
Customers struggle with adoption and are seeking help with their usage problems.
Most are interested in developing a new relationship with their vendors that
meets this need. A recent survey by Neochange and Sandhill revealed that almost
two-thirds of enterprise buyers achieve less than 49% effective adoption. With
customer experience improved and the adoption discipline institutionalized, ISVs
can turn their attention externally to understand where customers are struggling
with the ISV’s own products.
Shared internal knowledge alone is insufficient to address customers’ adoption
problems. ISVs also need to reach out proactively to customers to understand
their effective usage patterns and identify adoption barriers in the customer’s
environment. The adoption discipline coupled with EUM technology is a powerful
combination to achieve this purpose.
ISVs can work closely with selected customers to monitor their effective usage
of the ISV’s products. An adoption ‘health-check’ will reveal low effective
usage areas of the application as well as low-adoption groups within the user
base. Both are opportunities to help the customer make better and more
consistent use of the product, across a wider user base, to realize greater
business value. While underlying needs should be analyzed, interventions may
include delivering additional training and services (e.g. agile configuration,
workflow and usability improvements) to shore up gaps. This adoption
health-check also provides an opportunity to deepen the customer relationship.
Gains in effective usage and resulting financial benefits – the actual ROI –
should be broadly communicated within the current customer environment to boost
confidence and loyalty. The success story can also be disseminated to other
customers through press releases, white papers, user communities, blogs and
other channels. Ultimately, ISVs should leverage intelligence and insights about
customer effective usage patterns to identify and implement high-impact product
improvements and services modifications (e.g. refining training programs and
implementation methodologies). Product Management, Services and Sales &
Marketing all benefit. Adoption insights and actual usage data can be further
used to quash erroneous perceptions (e.g. slow application response times) and
identify problems not caused by the software product, such as skills/experience
gaps and inconsistent practices across the user base.
Still further, ISVs can use their insights into customer effective usage and
drivers of business value to create new services that will stimulate the upgrade
cycle. Effective adoption is the industry’s current limit to growth.
Step #3 – Lead Customers to Success: Capture Revenue Opportunity
Customers are willing to pay for a new relationship with their vendors, but
vendors will need to deliver the business value that customers need – not just
technical services.
The Neochange/Sandhill survey identified effective adoption as the most
important factor for realizing business value from technology and indicated over
80% of customers are willing to pay for services that enable this. Yet ISVs have
historically focused on technical support and traditional implementation
services. For every dollar spent on implementation, customers will spend at
least another dollar on value realization.
Knowing this, ISVs should re-orient their service portfolio more towards the
goal of customer value realization. The effort starts with the existing customer
base by developing an adoption focus within the support and service delivery
functions. The benefits are considerable. Effective user adoption increases
customer switching costs, enables value-based pricing that prevents price
erosion, produces visible ROI for customer success stories to drive other sales
and provides a platform for up-selling and cross-selling.
Furthermore, since a rebalanced portfolio mix would include a lesser proportion
of implementation-focused services, which typically have a lower margin, overall
service profitability will improve. This is a win/win case for both ISV and the
customer. The Neochange/Sandhill survey indicated that 95% of customers were
seeking a new relationship with their vendor that includes greater leadership in
software adoption.
Large enterprise ISVs, such as Oracle, SAP and CA understand the maintenance
revenue threat and importance of adoption and have begun taking steps to address
the problem. SAP makes itself a responsible partner to reduce customers’ total
cost of ownership and increase benefits, using scorecards to measure value
realization. At CA, “customer value experience” teams work cross-functionally
across the enterprise to increase user adoption and customer satisfaction as
well as deliver new value approaches.
ISVs can establish value assurance services by reorienting existing services as
well as developing new offerings with specific value-enhancing objectives. EUM
can be used to baseline effective usage and demonstrate achievement of gains as
improvement recommendations are implemented. In all cases, value assurance will
be achieved through cross-functional efforts involving a high degree of
communication and collaboration. Services partners, working on behalf of the
customer in a trusted advisor role, can be instrumental to ISVs in helping
customers realize value. Value assurance services may include customer ROI
acceleration offerings, business domain maturity assessments and organizational
change leadership.
These extended services provide new paths to value for customers, thereby
deepening the customer relationship while driving additional services revenue.
Innovate to Thrive
Taken together, these three steps can produce financial benefits equivalent to
over 20% of annual revenue, including cost reduction from CRM/PSA adoption,
protection of maintenance revenue, revenue enhancement from license upgrades and
up-selling as well as revenue extension from new services (see Figure 1). While
the current business environment makes an economic opportunity of this magnitude
difficult to imagine, the technology industry’s history is built on examples of
innovation driving subsequent waves of growth.
Faced with the ‘perfect revenue storm’ of current economic conditions, industry
consolidation, and increased usage transparency, ISVs must act now. Moving
forward, customer perceptions of value will continue to drive the software
industry.
The economic opportunity for those willing to make the changes and investments
to mobilize can be lucrative, but many ISVs will not survive the industry shift.
Successful executives will use customers’ adoption challenges as a source of
revenue growth and innovation to thrive through challenging times.
Chris Dowse is CEO and Founder of Neochange, Inc. Ben Galison is
a Principal with Neochange. It is the leading management consulting firm focused
exclusively on the complex challenge of Effective IT Adoption. Neochange’s
innovative AdoptITTM methodology mitigates adoption risk and accelerates
corporate earnings improvement. For article feedback, contact Chris and Ben at
inquiries@neochange.com
 
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